RPF-0073-4_Rule_Interview_with_Wade

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00:00:29.640 | Have you ever heard of the 4% rule for retirement planning?

00:00:34.640 | Have you ever wondered where that came from, what the history is, and

00:00:38.840 | what that rule actually means?

00:00:41.600 | Today's show is an introduction to the history and the science behind the famed 4% rule.

00:00:49.520 | [Music]

00:01:05.520 | Welcome to the Radical Personal Finance Podcast. My name is Josh Rasheeds. Today is Wednesday, October the 1st, 2014.

00:01:14.640 | Today is episode 73 of the show, and we're going to be talking about the 4% rule with Dr. Wade Pfau,

00:01:22.120 | professor from the American College of Financial Services.

00:01:25.440 | He knows his stuff, and he's far more qualified to teach you than I am.

00:01:29.400 | [Music]

00:01:38.120 | If you pay any attention to online writings, or if you pay any attention to some financial planning writings,

00:01:43.720 | you'll often hear about this thing called the 4% rule. And if you don't pay any attention to that stuff, awesome.

00:01:49.920 | I'm glad you're here. I don't want to pretend that everybody always pays attention to those aspects of

00:01:56.920 | the other online financial media. It doesn't really matter. I'm going to introduce you to it today, but

00:02:02.120 | through an interview with Dr. Wade Pfau from the American College. And

00:02:05.960 | before we do that, I just want to give you some very quick background.

00:02:10.920 | The 4% rule, I've often mentioned it on the show, and I think it is a useful, very, very useful rule.

00:02:18.280 | But it's not a panacea. It's not a solution for every retirement planning

00:02:23.060 | "whoa" and for every retirement planning question. And the reasons

00:02:28.480 | why it's useful, and the reasons why it has problems, are many. And they're complicated.

00:02:35.080 | And it's very challenging for me to present them all in an overall format.

00:02:40.840 | They have to be looked at as an individual situation.

00:02:44.400 | So I've been trying to think about how to bring you some of this more technical content, because it's very challenging to

00:02:50.320 | transform a, you know, a 20-page academic paper filled with academic ease and filled with charts and graphs and

00:02:58.320 | illustrations into

00:03:00.240 | compelling, interesting, and yet accurate and informative audio. Very challenging for me to do.

00:03:06.580 | But I decided to start by asking Dr. Wade Pfau to come on this show and for us to discuss it.

00:03:12.400 | And so we're gonna do that in today's show.

00:03:14.400 | And we're gonna talk about the history behind this. And we're actually celebrating the 20-year anniversary of the original paper that

00:03:22.840 | popularized the 4% rule. And in today's interview, you're going to hear some details on it.

00:03:28.960 | You're gonna understand, I think, a lot more about the 4% rule.

00:03:32.400 | What are the pros and cons? And we're gonna discuss some of the research behind it.

00:03:36.600 | And I think you'll find it very, very valuable. Very quick introduction to Dr. Wade Pfau.

00:03:41.040 | He is a PhD, he has a PhD in economics, and he is also a chartered financial analyst,

00:03:47.320 | which is the gold, in case you're unfamiliar with financial planning designations, the CFA program is very highly regarded for

00:03:55.680 | for the integrity, the academic integrity of its research.

00:04:00.080 | It's very much focused on investment research. And Dr. Wade Pfau holds that charter designation.

00:04:05.200 | And he spends all of his time now researching the retirement planning

00:04:09.840 | situation with the American College, which is the American College for Financial Services, and

00:04:15.040 | very involved in the financial services industry. I hope you enjoy the interview. This has been, it was a challenge for me to

00:04:21.600 | try to do it in a way that is accessible, but yet also technically accurate.

00:04:27.400 | And so, but I think we pulled it off, and I think it'll be interesting. That's it. Here's the interview.

00:04:32.320 | So, Dr. Pfau, thank you for joining us on today's show. I appreciate you making the time in your schedule to join us.

00:04:39.580 | Sure, my pleasure.

00:04:42.120 | So, obviously, we're here today to talk primarily about retirement and some of the retirement distribution

00:04:49.800 | studies and research that has been done.

00:04:52.360 | But before we go into that, what I'd like to do is I'd like to introduce you to the audience.

00:04:56.840 | Would you share with us a little bit about how you got started in your current line of research,

00:05:02.400 | what your personal background is, and what got you interested in the work that you're now doing in retirement research?

00:05:09.120 | Sure. Yeah, well, I grew up in Michigan and Iowa, and then in high school, I

00:05:15.400 | well, initially just thought I'd always be a scientist, but then discovered economics and really liked economics, decided to major in economics,

00:05:24.960 | went to grad school and got a PhD in economics.

00:05:27.720 | And it took me a while still to discover financial planning. I mean, not that I discovered it, but to find it for myself.

00:05:34.200 | So, though in graduate school,

00:05:37.040 | my dissertation was about in the 2000s, President Bush had that proposal to create personal retirement accounts,

00:05:45.080 | which would carve out part of Social Security to create a

00:05:49.200 | savings account where people would then be responsible to save for their own retirements rather than relying as much on Social Security.

00:05:55.680 | And my dissertation was about analyzing that, and that would ultimately tie over to financial planning, though

00:06:02.880 | after graduating, I went to Japan. I worked 10 years at a university in Japan teaching economics,

00:06:09.760 | and at that time was focusing more on the national pension systems of different countries,

00:06:14.880 | but then had an opportunity to

00:06:18.800 | to do research and to submit an article to the Journal of Financial Planning,

00:06:22.760 | got a good reception about that, and ultimately just found that retirement income planning was, it's really interesting to do research in that area.

00:06:31.200 | It's really important with the public now that there's a lot of interest in retirement planning as more and more people are making that transition.

00:06:38.720 | And so I really just found my niche then

00:06:41.200 | doing the same sort of research I did in my dissertation, which is simulating how different types of strategies

00:06:48.120 | will work out over long periods of time with saving for retirement and then retired and how that all works out.

00:06:54.160 | So now you work as a professor at the American College. So other than that,

00:06:58.480 | other than your work as a professor, you don't have any,

00:07:01.640 | you're not running a financial services practice or actively

00:07:05.560 | selling any products or consulting with clients, right?

00:07:08.760 | Yeah, that's right.

00:07:11.200 | I joined the American College a year and a half ago, and I do work with a company that provides financial planning software in-stream.

00:07:18.880 | But no, I'm not an active practicing financial planner and also not selling any sorts of financial products.

00:07:26.320 | Awesome. So as we record this, it is September 29, 2014.

00:07:32.240 | And where I thought I'd like to start is I'd like to start with you

00:07:37.040 | maybe giving a survey of the history of retirement planning research.

00:07:42.920 | So it's the 20 year anniversary of William Bengen's original article.

00:07:47.920 | Start with us there.

00:07:50.000 | Share with us the course of the research that's been done in the academic community

00:07:53.600 | over retirement distribution rates over the last 20 years.

00:07:56.480 | OK, sure. Yeah, William Bengen really got the ball rolling with how the public

00:08:03.040 | and financial planners look at retirement income.

00:08:06.680 | And what he was doing in the 1990s was responding to a really naive way to think about it.

00:08:12.200 | So the idea going around in the 1990s and still today, if you listen to Dave Ramsey,

00:08:18.240 | he's he's doing the same thing that the same mistake people are making before.

00:08:22.240 | And that's just you plug in some return into a spreadsheet.

00:08:26.080 | So, for example, if you say after inflation, the S&P 500 has averaged about a 7% return.

00:08:32.320 | So plug in a 7% return into a spreadsheet.

00:08:35.480 | And then that tells you the safe withdrawal rate is 7% because every year

00:08:39.440 | your portfolio goes up 7%, you withdraw 7%.

00:08:43.400 | You never dip into your principal at all.

00:08:45.720 | You just could sustain a 7% withdrawal rate forever.

00:08:48.360 | That's kind of where the discussion was in the 1990s.

00:08:52.280 | And so Bill Bengen corrected all that.

00:08:54.920 | He thought that sounded a bit odd, and so he just decided to look at

00:08:59.640 | consider a 30 year retirement, so somebody a couple of 65 years old,

00:09:04.720 | at least one of them living to 95.

00:09:06.880 | And one of the issues today is people are living longer and longer.

00:09:09.880 | So 30 years is not so conservative anymore.

00:09:12.520 | But at the time, that was a relatively conservative time horizon.

00:09:16.040 | And then he looked at different 30 year periods in history.

00:09:19.200 | So he looked at 1926 to 1955

00:09:23.120 | and then somebody retiring in 1927 through 1956.

00:09:26.560 | So just looking at these hypothetical individuals in history, retiring each year

00:09:32.200 | and trying to figure out what percent of their retirement

00:09:35.480 | day assets could they withdraw.

00:09:38.240 | And then that's giving them an amount of retirement income

00:09:41.640 | that they then adjust that income for inflation in each subsequent year

00:09:46.080 | and have that strategy be sustainable for at least 30 years.

00:09:49.960 | And he found that the worst case scenario in history was a 1966

00:09:55.200 | hypothetical retiree who could have with a portfolio of 50 to 75%

00:10:00.560 | stocks, could have withdrawn just slightly more than 4%

00:10:04.240 | of their retirement date assets.

00:10:06.400 | And that gave us the 4% rule.

00:10:08.120 | And that what that was doing was introducing a sequence of returns risk

00:10:12.240 | that even if somebody's average portfolio return is pretty decent,

00:10:17.160 | the order that the returns come is really important.

00:10:20.560 | If somebody has poor market returns early in their retirement

00:10:24.160 | and they're trying to fund a constant spending amount,

00:10:28.200 | they have to withdraw an increasing percentage of what's left in the portfolio.

00:10:31.720 | Because this is an important point that confuses people.

00:10:34.960 | The 4% rule is not every year you withdraw 4% of what's left in the portfolio.

00:10:40.400 | It's just in the first year you withdraw 4%

00:10:42.920 | and then you adjust your withdrawals for inflation.

00:10:45.920 | So if your portfolio is going down in value,

00:10:48.840 | you have to withdraw an increasing percentage of what's left

00:10:51.920 | to maintain the same spending power.

00:10:54.800 | And so the sequence of returns risk, if your portfolio is losing value

00:10:58.720 | early in retirement, you're withdrawing an increasing percentage of what's left.

00:11:02.600 | And then you're ultimately digging a hole that can be very hard to get out of.

00:11:06.400 | And that's why even with higher average returns,

00:11:10.320 | that the additional volatility created by the order of those returns

00:11:15.240 | has caused worst case scenarios in U.S.

00:11:17.960 | history to fall to around 4%.

00:11:21.000 | And that so that was now we have the 4% rule

00:11:24.560 | at the time that he did that research, he was bringing down the expectations

00:11:28.320 | that 7% is not a safe withdrawal rate.

00:11:30.560 | It's something more like 4%.

00:11:33.720 | And since then, it really took a while for the research to get going.

00:11:38.760 | There was the Trinity study in 1998

00:11:41.600 | that people, if they start searching about retirement income on the Internet,

00:11:46.960 | they might see references to the Trinity study.

00:11:49.920 | But the Trinity study didn't really do anything new.

00:11:53.120 | It's just people hadn't really heard of Bingen yet when the Trinity study came out.

00:11:56.840 | It was looking at the same data Bingen looked at.

00:11:59.920 | But rather than reporting the worst case scenario, it looked at, well,

00:12:04.240 | if you used a 5% withdrawal rate, what percent of those historical cases

00:12:08.040 | would that have worked and so forth?

00:12:10.160 | Yeah, I made that an important.

00:12:12.240 | I made that mistake myself, starting with the Trinity study

00:12:14.800 | and instead of with Bingen's.

00:12:16.440 | So I appreciate your you corrected even me.

00:12:19.040 | So I appreciate that.

00:12:20.360 | Oh, sure.

00:12:21.960 | Yeah, I think, well, the Trinity study, that was it came out in 98,

00:12:26.120 | right near the peak of the tech bubble.

00:12:28.280 | And Scott Burns at the Dallas Morning News really picked up on that study

00:12:32.920 | and was writing a lot about it.

00:12:34.200 | And he had a syndicated personal finance column.

00:12:36.800 | So it's sort of for a lot of people that the first they ever heard of this area

00:12:42.440 | was through the Trinity study.

00:12:45.000 | That's just because it got the media coverage.

00:12:49.040 | What rates of distribution were retirement planners

00:12:52.080 | prior to Bingen's work actually using?

00:12:54.520 | Was it the 7% number you referenced?

00:12:56.440 | Was it higher? Was it lower?

00:12:57.560 | Was there any methodology behind it?

00:12:59.200 | I don't think there was a lot of methodology.

00:13:03.520 | This is kind of before my time and we don't I'm interested in this history.

00:13:07.640 | This is a great question.

00:13:09.920 | And I've occasionally talked to some planners who were around in those days,

00:13:16.040 | and I don't think there was any clear methodology

00:13:18.520 | in terms of even thinking about sustainable withdrawal rates,

00:13:22.280 | because that was such a naive idea that you just plug in the return.

00:13:27.080 | And that's really where it seems like the state of the art was.

00:13:31.280 | At that point, planners were still not even using Monte Carlo simulations

00:13:35.640 | for the most part.

00:13:37.000 | They really were just plugging returns into spreadsheets

00:13:39.440 | and based in their analysis on that.

00:13:41.840 | So there wasn't, as far as I can tell, a lot of methodology behind it.

00:13:46.200 | And that's where Bingen really made that contribution that kind of

00:13:50.200 | helped set up the revolution of now financial planners

00:13:53.960 | using Monte Carlo simulations.

00:13:56.320 | Bingen wasn't using Monte Carlo simulations,

00:13:58.640 | but he was using a similar type of idea of let's look at just different

00:14:02.880 | historical periods, which is getting at the same sort of issue of

00:14:06.400 | there's a lot of variability and how do we account for that variability to get

00:14:10.120 | get better results for our analysis? And that's

00:14:14.760 | that's what planners are doing today that I don't think they were doing

00:14:17.640 | all that much prior to Bingen.

00:14:20.600 | My guess is also if we were and I'd be interested in the history as well.

00:14:23.840 | This is just a guess from my reading in the investment arena.

00:14:27.680 | But my guess is that planners prior to that time, at least if they were

00:14:32.240 | knowledgeable, were probably focusing more heavily on dividends.

00:14:35.800 | Historically, there's been a shift that I've observed of a shift

00:14:40.640 | away from paying dividends by corporations that used to be

00:14:44.360 | kind of how the value of your stocks were primarily measured.

00:14:46.720 | Nowadays, with the with the more problematic

00:14:50.920 | taxation of dividends, many companies have shifted away from focusing on dividends.

00:14:55.520 | So I think that was historically more important.

00:14:57.720 | Also, with the I guess

00:15:01.240 | prime with the large defined benefit programs that were available,

00:15:05.920 | I think a financial planner's job, it would have been unusual, my guess,

00:15:10.120 | to try to put everything based upon a portfolio of stocks and bonds,

00:15:14.360 | because usually a planner may have had a defined benefit plan,

00:15:18.280 | a pension income, a Social Security stream of income,

00:15:22.680 | and then also maybe other assets as well.

00:15:25.240 | Whereas I think over the last 20 years, there's been such a marked decline

00:15:29.000 | in the defined benefit pension plans that now a planner is

00:15:32.600 | probably having to put a lot more emphasis

00:15:35.840 | on the portfolio of stocks and bonds to provide retirement income.

00:15:39.480 | That'd be my guess.

00:15:40.320 | But I think that's a good point, and Vanguard had a study about that as well,

00:15:45.200 | that for a lot of this historical period,

00:15:47.920 | just the dividends and interest coming from a portfolio without even making any

00:15:52.280 | effort to try to strive to get higher yields, higher dividends or

00:15:55.800 | or higher yields from bonds.

00:15:58.040 | But you're getting four or five, six or seven percent

00:16:00.840 | yield from a basic portfolio, kind of focused on a total returns

00:16:05.800 | portfolio for much of that historical period.

00:16:08.640 | So I think that's a good point, that you could sustain

00:16:12.680 | those kinds of spending rates just with the income from a portfolio until

00:16:17.240 | just the more recent years where dividend rates have fallen so low

00:16:21.760 | and interest rates are now so low.

00:16:23.680 | Right. Yeah, I think you're making a good point there.

00:16:25.680 | And this, I think, is a big deal as to why historically there's been such a focus

00:16:29.440 | on shifting the portfolio from stocks to bonds, because traditionally

00:16:33.440 | bonds were how you drew income from a portfolio.

00:16:35.800 | You had your coupon payments, you had your defined yield.

00:16:38.280 | You knew what it was going in.

00:16:40.240 | And so that stability of income reflected, was reflected in your plan.

00:16:44.320 | That was the income that you based that on.

00:16:46.920 | Well, it's much more challenging in 2014

00:16:50.080 | when your yield on your bond portfolio, the stated yield is quite low

00:16:54.560 | and you need to go beyond that to provide your level of income.

00:16:58.000 | And so there are some of these macroeconomic changes

00:17:01.640 | have had made a big difference in the work of a financial planner

00:17:05.280 | to apply to an individual situation.

00:17:08.360 | Mm hmm. Yeah, it becomes much more expensive to support.

00:17:11.920 | A retirement income from a fixed income portfolio with interest rates so low.

00:17:17.240 | So if you're going that route, you'd have to devote a lot more of your assets to it.

00:17:21.960 | And yeah, it's just it's tough in this environment.

00:17:24.080 | Extremely tough.

00:17:25.240 | So after Bingen, then where has the research gone?

00:17:28.720 | Trace the thread for us.

00:17:30.160 | We're looking at four different key financial planning studies

00:17:36.480 | since Bingen, there was in 2001,

00:17:39.400 | various and Mark Warshawski and John Amarik

00:17:43.400 | had a study in the Journal of Financial Planning

00:17:45.520 | that looked at how partially annuitizing with a with an income annuity,

00:17:50.400 | a single premium, immediate annuity could help increase the sustainability

00:17:55.560 | the sustainability of a retirement portfolio.

00:17:58.200 | So that was the key study that would lead further down the line

00:18:02.800 | to some more developments.

00:18:05.000 | And then I think the next pivotal study came in.

00:18:08.400 | It's actually I just realized this last week in October 2004.

00:18:13.560 | So exactly 10 years after Bingen, 10 years ago from now,

00:18:17.160 | Jonathan Guyton and his initial study in the Journal of Financial Planning

00:18:21.240 | about how to adjust spending.

00:18:23.760 | So one of the issues with the 4% rule and with the bank,

00:18:29.800 | I mean, Bingen was just trying to create a framework to explain

00:18:32.960 | why 7% is not a safe withdrawal rate.

00:18:35.000 | I don't think it was ever meant to serve as a retirement income strategy,

00:18:39.080 | but with its popularity in the press and everything,

00:18:42.440 | it kind of became the de facto strategy.

00:18:45.320 | Right. And it's a strategy where you don't really adjust your spending,

00:18:48.240 | even if your portfolio is declining,

00:18:50.200 | because you're essentially playing a game of chicken

00:18:52.600 | and hoping that your portfolio is not going to run out.

00:18:56.040 | But but Jonathan Guyton looked more carefully at the idea that, well,

00:19:00.280 | if your portfolio is losing value, you might want to cut your spending.

00:19:03.680 | And if your portfolio is growing because 4% is supposed to be

00:19:07.760 | a conservative spending rate, that's supposed to work in the worst case scenario.

00:19:11.920 | So in other cases, your portfolio is going to continue to grow.

00:19:14.920 | And at some point you can increase your spending.

00:19:17.200 | And Jonathan Guyton precisely 10 years ago published an article

00:19:21.840 | where he developed guardrails and decision rules to kind of set parameters that.

00:19:27.680 | To to define when you can go ahead and increase your spending

00:19:30.920 | or when you should actually take action and decrease your spending.

00:19:34.680 | And he wrote how.

00:19:38.000 | If you're willing to make cuts in your spending,

00:19:40.280 | you can go ahead and start with a higher spending rate

00:19:42.520 | and having that flexibility reduces some of the sequence of returns risk.

00:19:47.040 | So it actually.

00:19:47.960 | Can potentially let you have a higher initial withdrawal rate and.

00:19:52.160 | Not not necessarily ever have to cut your spending below

00:19:56.840 | where it would have otherwise been if you were following the straightforward 4% rule.

00:20:01.360 | So did that study have an impact on some of the alternative strategies

00:20:05.480 | that we've built out, for example, the floor approach,

00:20:08.520 | you know, where we say, OK, as long as we've got this basis,

00:20:12.240 | then we can adjust the discretionary spending on top of that.

00:20:15.160 | Was that study a major influencer on some of the techniques we developed?

00:20:18.720 | No, I would say no to that, and that kind of gets to another issue

00:20:26.080 | that there's actually two completely distinct schools of thought

00:20:29.320 | about retirement income.

00:20:30.440 | And what I call the probability based approach

00:20:34.720 | would encompass Bingen's work and Guyton's work

00:20:38.240 | where there's not really a distinct floor or Michael Kitsies,

00:20:42.640 | who's a really popular blogger and financial planner in Maryland.

00:20:46.560 | He he makes the statement that the 4% rule is a floor with upside approach.

00:20:53.480 | But for people who are focused on flooring,

00:20:55.760 | they are horrified by that kind of statement, because with the safety

00:20:59.760 | first school, when you're building an income floor,

00:21:02.680 | you don't use a total returns investment portfolio

00:21:06.000 | because you don't want to have any stocks in the portion of the portfolio meant

00:21:09.960 | to provide that for the floor.

00:21:12.720 | It needs to be provided through fixed income,

00:21:15.600 | which bonds being held to their maturity dates or with income annuities.

00:21:19.720 | There's not a room for stocks in that floor.

00:21:23.920 | And the Guyton approach

00:21:25.400 | is a probability based.

00:21:27.920 | You're using a total returns investment strategy, and there really is no floor

00:21:31.840 | because if there's really bad markets, if the stock market's doing terrible,

00:21:36.360 | you're going to have to keep cutting the spending.

00:21:38.800 | And and I mean, there's.

00:21:41.200 | Any time you try to have a floor,

00:21:47.920 | so to speak, with with stocks, then that's going to be a floor

00:21:50.920 | that's at risk and may not work out.

00:21:53.560 | And Jonathan Guyton, as well as one of the leading advocates of the idea that.

00:21:58.000 | These sorts of probability based approaches are superior to the floor

00:22:03.520 | and upside approaches,

00:22:05.680 | because with the floor, the upside approach,

00:22:08.400 | especially with the interest rates so low today,

00:22:10.520 | it's very expensive to lock in that floor with dedicated assets.

00:22:14.720 | And so he he thinks that ultimately

00:22:19.520 | people might have to reduce their spending more,

00:22:22.280 | even though they have that basic floor in place.

00:22:24.320 | They may never get the chance to meet their discretionary expenses

00:22:27.880 | because they've just had to put so much effort into building that basic floor.

00:22:31.560 | And he would prefer or he thinks clients are going to be much happier

00:22:36.120 | with a total returns approach that has that flexibility and not.

00:22:41.160 | And that allows stocks to be used for any part of the portfolio.

00:22:46.880 | Well, this is where I mean, I see a big difference.

00:22:50.000 | Yeah, it's it does help.

00:22:51.440 | And one of the frustrations I have as a planner

00:22:55.480 | is that you have to individualize this for clients.

00:23:00.600 | So some clients may have a tremendous history with investing in stocks.

00:23:06.560 | They may have a comfort level with the volatility,

00:23:09.240 | and they may have an implicit faith and confidence in the total return strategy.

00:23:15.240 | History, in my opinion, history would demonstrate that

00:23:18.360 | the growth of companies and the growth of equities has been one of the most

00:23:22.280 | powerful wealth production machines of all time.

00:23:25.560 | And I don't see a lot of compelling evidence to say that

00:23:29.080 | there are major things that are going to change that.

00:23:31.880 | It just seems to me like that's what history has shown.

00:23:34.440 | So and I don't see again, I don't see any reason why to discount that going forward.

00:23:39.240 | Now, relatively speaking, it may be higher or less.

00:23:41.600 | And that's one of the things I'm going to cover in a few minutes with you.

00:23:43.440 | But but that so but that it takes a while to get to that kind of comfort level

00:23:48.320 | with stocks, and many people are simply not comfortable.

00:23:51.480 | And so the development of something like a floor approach where,

00:23:55.680 | just to clarify for the listening audience, my understanding of what I would use

00:24:00.680 | with a floor approach would be to say, what's the minimum level of income

00:24:04.080 | that you need to maintain the minimum level of lifestyle

00:24:07.320 | that you're willing to to live on, whether that's needs versus wants

00:24:11.320 | or discretionary versus essential, however you characterize those differences

00:24:15.240 | of income, we would set a floor in place, whether with Social Security income,

00:24:19.720 | income annuities, as you mentioned, yield off of a fixed income portfolio,

00:24:24.720 | whatever that that base is.

00:24:26.960 | And then we would invest for a higher return on top of that.

00:24:29.880 | Well, that gives the client the confidence of knowing that no matter what,

00:24:33.560 | I always have at least this amount of money to spend.

00:24:35.600 | That's much more intuitive.

00:24:37.160 | In my experience, that's much more intuitive with with clients

00:24:40.520 | and how we as ordinary individuals think about our expenses.

00:24:46.160 | And so it seems like that resonates more with clients than does the idea

00:24:51.000 | of a total returns portfolio and massive volatility and massive fluctuations does.

00:24:55.760 | But yet, scientifically speaking, it seems that any study I've read so far,

00:25:00.800 | and tell me if there's some that I haven't that disagree with this,

00:25:03.800 | but the greater the percentage of your portfolio that's allocated to equities,

00:25:07.920 | the higher the total wealth over time, simply because of that massive difference

00:25:12.920 | between the productivity of companies versus other investments.

00:25:16.280 | So there's a challenge between what is intuitive for clients

00:25:20.840 | in their situation versus what the academic literature might say.

00:25:24.720 | Mm hmm. Yeah, I think one.

00:25:28.440 | So different advisors and different clients will look at this differently.

00:25:31.640 | And one way to kind of a litmus test is now that a lot of financial planners

00:25:36.320 | are using Monte Carlo simulations, they run the plan and they tell the client

00:25:40.880 | your plan has a 90 percent chance for success.

00:25:43.440 | So if you're comfortable with that, then that means you're probability based,

00:25:48.320 | that you're willing to go with that total returns investment approach.

00:25:51.320 | 90 percent chance that it's going to work.

00:25:53.840 | If it looks like you might be on a path where it's not going to work,

00:25:56.520 | you might have to make some small adjustments, but things should generally be OK.

00:26:00.000 | So if the client's comfortable with that, then then that total returns

00:26:04.120 | approach is right for them.

00:26:05.760 | But if they're more focused on a 90 percent chance for success

00:26:09.200 | means there's a 10 percent chance for failure.

00:26:11.600 | There's a 10 percent, 10 percent chance

00:26:14.640 | you're going to run out of money before the end of your projected lifetime.

00:26:18.480 | And if they really focus on that and are really, I mean, that's frightening

00:26:23.880 | and causes them to lose sleep and everything,

00:26:26.280 | then that's where the safety first approach comes in.

00:26:28.480 | And that's where you do this.

00:26:30.440 | Yeah. As you're saying, it's more logical for the client.

00:26:33.160 | It's an asset liability matching that you're going to match your assets

00:26:37.280 | to your spending needs so that you have similar risk characteristics

00:26:42.000 | and that you're not going to have stocks in the part of the portfolio

00:26:46.560 | that's meant to cover your basic needs.

00:26:49.200 | And so then no matter what, that kind of safety first approach,

00:26:52.520 | you really build in that secure floor.

00:26:54.640 | And that might be costly so that you may have less upside potential at that point.

00:27:01.080 | But if that's helping an individual to sleep better at night, then that

00:27:04.280 | then that's the appropriate approach for them.

00:27:07.200 | Could you explain, please, what a Monte Carlo simulation is

00:27:11.080 | and how it works and why it's useful?

00:27:14.080 | Oh, sure. Right.

00:27:15.560 | So the alternative to Monte Carlo simulation is you

00:27:19.280 | you put together a spreadsheet and you just plug in a rate of return

00:27:23.240 | for the portfolio.

00:27:25.200 | So you just every year, if you say the portfolio is going to give you a six

00:27:28.480 | percent return, then every year you just have the assets go by six percent.

00:27:32.800 | And then you figure out,

00:27:34.600 | well, have you run out of money by a particular date in the future?

00:27:37.520 | So Monte Carlo simulations were originally developed

00:27:41.640 | in the 1940s as a part of the effort in World War

00:27:45.440 | two of trying to introduce randomness into

00:27:49.000 | well, into the analysis.

00:27:51.080 | So maybe the average return on the portfolio could be six percent.

00:27:56.320 | But there's volatility, just like the stock market.

00:27:58.480 | There is volatility.

00:27:59.280 | Some years there may be a 20 percent return.

00:28:01.920 | Other years there might be a negative 20 percent return.

00:28:04.440 | And what Monte Carlo simulations do and they've really it's just.

00:28:10.080 | Well, there was a famous article in 1997 in the Journal of Financial Planning

00:28:15.000 | telling advisors to wake up and start using Monte Carlo simulations.

00:28:18.800 | And then in the 2000s.

00:28:21.680 | Now, these days, most every financial planning software is going to offer it.

00:28:26.600 | What it's doing is just providing a whole range of outcomes.

00:28:29.280 | So you may have 10,000 simulations of what could the market

00:28:34.160 | returns look like in each simulation over the retirement?

00:28:37.200 | If they're even if they average six percent, but some years are up,

00:28:40.920 | some years are down and you just draw randomly.

00:28:44.200 | You're just random draws of a return

00:28:48.040 | that's based around some average return with some degree of volatility

00:28:52.040 | around that return projected out over 30 or 40 years or whatever the case may be.

00:28:57.120 | But each of these 10,000 simulations will have that

00:29:00.640 | a 30 or four year sequence, 30 or 40 year sequence of market returns

00:29:05.560 | based on the characteristics you've defined.

00:29:09.800 | And then you get the whole range of outcomes.

00:29:12.320 | And then you could say something like what I mentioned earlier,

00:29:14.800 | that 90 percent chance for success means.

00:29:19.240 | If you had these 10,000 simulations in 9000 cases, the plan would have worked

00:29:24.560 | in 1000 cases, the plan would have run out of money before the end.

00:29:28.600 | So it didn't work.

00:29:30.640 | And that's what the Monte Carlo simulations are doing.

00:29:33.120 | They're giving you more about the distribution and the probabilities

00:29:36.400 | associated with different outcomes

00:29:38.840 | rather than basing everything on just one fixed return.

00:29:41.960 | And then one answer, did the plan run out of money or not?

00:29:47.080 | When you define the plan not working, one of the things that to me is important

00:29:52.280 | and about about a Monte Carlo simulation is to understand

00:29:56.280 | what it means when it says the plan doesn't work.

00:29:58.360 | And this is the difference between kind of statistically stress

00:30:02.120 | testing it with a Monte Carlo simulation versus a real person in a real situation.

00:30:06.480 | And a Monte Carlo analysis, it's basically saying, can I sustain

00:30:10.640 | this level of expenses, this level of income off of the portfolio

00:30:15.200 | over this period of time, given these random variables

00:30:18.160 | and in input of rates of return, inflation rates, et cetera?

00:30:21.520 | And so failure is simply defined as not being able to sustain that level of income.

00:30:26.600 | That doesn't necessarily mean, however, that a human being

00:30:29.480 | couldn't maintain some level of income and couldn't adjust their expenses

00:30:33.960 | as time goes forward, depending on what their retirement distributions look like.

00:30:38.200 | Is that accurate?

00:30:38.920 | Right, that's accurate.

00:30:41.640 | That's and that's kind of one of the side effects of that Trinity study

00:30:45.200 | that set everything up as success rates and failure rates.

00:30:48.440 | Failure means that for the plan, you've set some kind of maximum age.

00:30:54.320 | So if you say, I want this plan to work through age 95.

00:30:57.600 | Well, if the portfolio is depleted at any point before age 95,

00:31:02.960 | you would call that a failure, even if it was age 94 or even if it was age 67.

00:31:08.160 | It doesn't make any distinction.

00:31:10.360 | And then you're right. It doesn't consider partial income.

00:31:12.960 | So people will still have Social Security.

00:31:15.480 | They'll still have any defined benefit pensions.

00:31:17.920 | If they decided to buy an income annuity, they still have income

00:31:22.240 | from the income annuity.

00:31:24.160 | And so failure can mean something very different.

00:31:26.360 | It simply means the financial portfolio, the portfolio of stocks

00:31:30.280 | and bonds has been depleted.

00:31:32.600 | But that doesn't necessarily mean the person doesn't have any spending power left.

00:31:37.600 | And it also if it happened, if they just missed their spending goal

00:31:42.400 | by one dollar in the final year, it counts as failure.

00:31:45.080 | But that's really not much of a problem.

00:31:48.000 | And as well, you're right, you could also make adjustments to spending, which.

00:31:52.720 | Which can be accounted for, and that's I'm now working with a financial

00:31:58.000 | planning software company that's going to let you do this, to have.

00:32:00.800 | Spending rules where you can adjust your spending

00:32:04.800 | based on what's happening in the markets.

00:32:07.320 | If you put a hard floor in where the different meaning of the floor,

00:32:11.560 | like if you say, I'm never going to let the spending fall below

00:32:14.440 | fifty thousand dollars a year, you could still fail

00:32:17.480 | because you're forced, you're going to then play that game of chicken.

00:32:21.400 | But if you don't have any kind of hard floor like that, where you're really

00:32:25.920 | going to just let your spending be completely flexible.

00:32:28.760 | Well, in that case, you never run out of money, though

00:32:32.000 | you may have your spending fall to very low levels.

00:32:35.680 | But right, that's all part of we need to have more sophisticated ways

00:32:39.720 | of measuring the quote unquote success or failure in terms of

00:32:43.600 | how much are you missing the spending go by or how much did you have to cut

00:32:47.960 | your spending or when did your portfolio run out and how much income do you have

00:32:53.000 | left, even if your financial assets are depleted and so forth?

00:32:57.640 | It's very just one simple measure.

00:33:00.440 | Right.

00:33:01.280 | I love practicing and retirement planning, but I also find it to be

00:33:05.200 | one of the most challenging areas to practice in.

00:33:07.880 | And here is something that I've observed just in my personal experience.

00:33:11.520 | We as human beings, I think we desire certainty.

00:33:16.200 | We desire a sense of certainty.

00:33:18.440 | And then especially when it comes to finance,

00:33:22.600 | we desire a real sense of knowledge of this is going to work.

00:33:27.160 | And this is there is a sense of certainty around it.

00:33:29.400 | And in the in developing the science of financial planning,

00:33:34.560 | I think one of the places that we probably go too far sometimes with

00:33:39.440 | as practitioners is we're trying to deliver.

00:33:45.120 | A sense of certainty in scenarios that are inherently uncertain,

00:33:50.360 | and so when a client is looking, so there are so many assumptions

00:33:54.640 | and I'm going to cover them in a few minutes,

00:33:56.360 | I want to talk about some of the assumptions that go into these formulas

00:33:59.120 | or into these studies, even.

00:34:01.280 | But there are so many assumptions upon which a financial plan is built.

00:34:04.640 | That there are many things that can happen that can cause a failure,

00:34:09.680 | divided in the in the Monte Carlo sense of not being able to maintain the full

00:34:13.640 | the full plan.

00:34:14.920 | And it's much less about the science of here is a number or here is what

00:34:20.080 | here is a plan that's going to work in every situation.

00:34:22.400 | It's much less about that than it is about having the ability to react

00:34:26.960 | and respond to changes in market conditions, to changes in financial conditions,

00:34:31.600 | to the general macroeconomy or to an individual's microeconomy.

00:34:36.240 | And I've come to the conclusion in the research I've done

00:34:41.000 | and just kind of thinking it through,

00:34:42.280 | people are often looking for the certainty of what's my number.

00:34:45.000 | And I've come to the conclusion that there is no number.

00:34:47.440 | There is no one number.

00:34:49.680 | There's just simply for each person, there's an initial,

00:34:52.640 | there's a comfort level with what risks you're willing to bear

00:34:56.800 | and what risks you're not willing to bear and what is failure and what is success.

00:35:00.400 | And there is no number that you can that you can point to and say,

00:35:04.200 | here's your number.

00:35:05.080 | What say you?

00:35:07.080 | Yeah, I think that's absolutely right, that people always need to stay flexible.

00:35:13.000 | And again, with the work Bingen did and then with the Trinity study,

00:35:17.280 | it was a case of just putting together some simplifying assumptions.

00:35:21.480 | And if you just read the research too literally,

00:35:23.840 | it's a set it and forget it approach that you just determine

00:35:28.560 | what percent of your retirement day assets you can spend

00:35:32.000 | and then just go with that forever without making any adjustments at any point.

00:35:35.400 | And of course, in reality, that's not the way to go.

00:35:38.240 | And that's where we've but but the Bingen work,

00:35:41.400 | well, Bingen subsequently did more work with the Trinity study

00:35:44.320 | didn't offer any suggestion about how to make those adjustments.

00:35:48.640 | And that's where we've had new research filling in some of those gaps.

00:35:52.600 | The Trinity authors did in 2011.

00:35:57.400 | Republish their basic results, and then.

00:35:59.960 | This is something like every five or 10 years,

00:36:03.760 | you should reset your withdrawal rate based on.

00:36:06.000 | Your new age and your new asset level, but it still wasn't very sophisticated.

00:36:11.400 | But but yeah, definitely, it's really a process of.

00:36:15.200 | Revisiting the plan, making adjustments.

00:36:18.760 | Seeing if the spending still seems to be on track or if maybe

00:36:23.760 | it's getting to be too high of a level and then as well,

00:36:27.280 | that's so Jonathan Guyton talks about the withdrawal policy statement.

00:36:30.880 | That's like an investment policy statement that and the investment policy

00:36:35.960 | statement, you you write down what you're going to do with what's your asset

00:36:39.800 | allocation, write down that you're not going to panic and sell all your stocks

00:36:43.960 | if the market declines and so forth.

00:36:46.120 | Well, the withdrawal policy statement is a set of rules.

00:36:48.840 | OK, here's the conditions where you're going to cut your spending.

00:36:51.720 | If if there's a big market drop one day, you don't have to panic.

00:36:56.320 | You don't have to suddenly cut your spending 50 percent.

00:36:59.400 | There's a there's a framework in place for how to make these adjustments

00:37:03.120 | and how to monitor what's going on with the portfolio.

00:37:07.800 | And just, yeah, that's part of that being flexible,

00:37:11.320 | but having a process in place so that you don't overreact.

00:37:14.360 | Was it being ready to?

00:37:18.200 | I didn't mean to interrupt.

00:37:18.880 | Excuse me. I was going to say, was it the Trinity study where?

00:37:22.320 | And this was a statistic that that I just learned

00:37:25.480 | that I had not I hadn't grasped this, but was it the Trinity study

00:37:31.320 | that showed that based upon a four percent withdrawal rate,

00:37:34.920 | that 96 percent of the portfolios wound up with at the end of the term,

00:37:41.080 | at the end of the 30 year term, they wound up with the same amount of

00:37:44.520 | in nominal terms, the same amount of investment assets that they started with.

00:37:48.800 | Was that the Trinity study that showed that?

00:37:50.520 | No, that wasn't the Trinity study that

00:37:55.920 | actually I was involved in that number a little bit,

00:37:57.720 | because William Bengen developed that number for a financial advisor

00:38:02.800 | article that he wrote in 2012.

00:38:06.160 | And then I wrote a blog post saying, yeah, that's that's I checked it out.

00:38:11.120 | And that's right.

00:38:11.720 | But historically, 96 percent of the time with the four percent

00:38:15.720 | rule, you'd still have in nominal terms just as much wealth as what you started with.

00:38:21.200 | But then I said, that's actually not the best way to think about it.

00:38:24.600 | You should be thinking about an inflation adjusted terms, right?

00:38:27.080 | That if your wealth stays at the same level after inflation.

00:38:31.200 | And in that case, it's about 50 percent of the time.

00:38:33.880 | But then Michael Kitsie has really jumped on that number.

00:38:37.280 | And I think he promoted that he uses that ninety six percent number

00:38:41.680 | in his presentations, even today still. And.

00:38:44.080 | And and that's the ninety six percent from the Trinity study, though, is.

00:38:51.520 | But that number shows up there as well in more recent versions

00:38:54.920 | that they say the four percent will have a ninety six percent success rate.

00:38:59.000 | Right. That. And with Bingen, it was 100 percent success rate.

00:39:05.280 | But what happened was they switched the bonds

00:39:08.640 | rather than using the intermediate term government bonds.

00:39:11.560 | They switched to long term corporate bonds.

00:39:15.200 | And in that case, the four percent rule just missed working in 1965 and 1966.

00:39:21.360 | So in their initial study, the four percent will had a ninety five percent

00:39:24.880 | success rate. But now that we've added more data over time,

00:39:27.600 | you get a ninety six percent success rate.

00:39:31.400 | It's interesting just because it shows what I learned

00:39:33.840 | by doing Monte Carlo simulations is I found the variability

00:39:37.320 | of potential returns from Monte Carlo simulations to be so incredibly massive.

00:39:41.920 | So you would I would do one scenario and there would be one sequence of returns

00:39:47.040 | where the client wound up with dying,

00:39:49.040 | you know, spending at their their their desired level of income

00:39:51.760 | and dying with a portfolio of 20 million dollars for, you know,

00:39:55.200 | just a middle class, mass affluent client.

00:39:57.520 | And then but they had a 22 percent failure rate.

00:40:00.280 | And, you know, it's zero money and the plan not working

00:40:03.440 | and then completely spending the money.

00:40:05.320 | And to me, when I started looking at those, the range of potential outcomes,

00:40:09.720 | it really just knocked me back because I had never realized

00:40:13.000 | what a big difference the market returns, the sequence of the market returns

00:40:18.200 | and then the actual market returns could make on a portfolio.

00:40:22.600 | And it just illustrates that even it illustrates the point.

00:40:27.640 | And the thing I like about the ninety six percent

00:40:30.280 | where you start the retirement and a ninety six percent of the cases,

00:40:34.120 | you start the retirement with a million dollars, you withdraw on a four percent.

00:40:37.000 | And at the end of 30 years, you still have the million dollars,

00:40:39.240 | same million dollars in nominal terms, not adjusted.

00:40:41.280 | I think that illustrates how.

00:40:46.640 | I guess the impact of those returns, because to me, that was shocking

00:40:49.720 | when I when I grasped that data, because I say, wow,

00:40:52.680 | I could still have the million dollars.

00:40:53.960 | So the mind would immediately go and react and say, well, the four percent rule

00:40:57.680 | is golden, ninety six percent of the time it's going to work.

00:41:00.160 | But then what about the other times where it doesn't work?

00:41:03.600 | And that can be in many that can be useful, but it can also be very misleading.

00:41:09.040 | And to me, one of the things that I've taken away from the research

00:41:13.920 | I've been doing is the need for flexibility.

00:41:16.280 | If a client is flexible as far as where they're willing to allocate

00:41:19.640 | their portfolio and flexible in their spending rates,

00:41:22.640 | a whole range of solutions can open up and we can apply some intelligent

00:41:27.200 | strategies to the distribution where there can be an amazing,

00:41:31.600 | you know, much higher distribution because of the flexibility.

00:41:35.360 | Have you have you observed that?

00:41:37.280 | Am I right in that or am I off base with with with your research?

00:41:41.040 | Right. You're right that with Monte Carlo simulations,

00:41:45.120 | you get such a huge range of outcomes and you're right about that.

00:41:47.800 | And some of those best case scenarios,

00:41:50.440 | your wealth grows 20 or 30 times over the retirement period.

00:41:53.760 | But well, and the other point about that ninety six percent number was

00:41:58.640 | to try to really highlight that the four percent rule is meant to be conservative.

00:42:03.080 | It's it's supposed to work in the worst case scenario. Right.

00:42:06.040 | And what that number is telling you is, you know, hey, in ninety six percent

00:42:09.360 | of the cases, you actually don't end up dipping into your principle,

00:42:13.240 | more or less after the end of 30 years.

00:42:15.240 | And yeah, I mean, that's.

00:42:19.920 | So there's a huge range of you could become incredibly wealthy, but and you

00:42:24.760 | typically you're not going to be dipping into your principle,

00:42:27.800 | the four percent rule is conservative.

00:42:29.960 | But right there are those cases where the four percent rule may not work

00:42:33.920 | and you do have to be flexible.

00:42:37.840 | I'm excited about the work that that you're doing

00:42:41.280 | and then some of the other academics are doing.

00:42:43.080 | And I'm especially excited about some of the work.

00:42:45.840 | I'm not sure if you pay much attention to the online, the early retirement

00:42:49.520 | community. And on one hand, I love the four percent rule

00:42:53.680 | because I think it's very useful.

00:42:55.040 | But on the other hand, I really feel as though

00:42:57.600 | we need to learn a little bit more about it.

00:43:00.640 | So I think the four percent rule is a very useful rule of thumb.

00:43:04.240 | Excuse me, thumb, because it's straightforward.

00:43:07.200 | It's easily understood.

00:43:08.160 | You need twenty five times your annual expenses.

00:43:10.400 | And if you have twenty five times your annual expenses

00:43:12.400 | in a diversified portfolio, you're probably going to be well suited.

00:43:15.840 | But I answered a question from a reader the other day, and I just said,

00:43:19.960 | if you're looking for me to the reader was thirty five, excuse me,

00:43:23.280 | listener was thirty five years old and said, I hate my job.

00:43:26.120 | I want to retire.

00:43:26.840 | And I've got basically a million dollars of assets. Can I afford it?

00:43:29.640 | And I said, if you expect me to feel confident telling you that, yes,

00:43:33.360 | you're going to be able to retire at thirty five years old and spend

00:43:37.120 | spend off of this four percent rule for the rest of your life.

00:43:40.560 | I'm very uncomfortable with that.

00:43:42.240 | But if we can bring in added flexibility, if you're willing during a time of

00:43:46.120 | of low market returns, if you're willing to go and add some part time income

00:43:50.040 | or willing to make a dramatic change in your spending, then yes,

00:43:53.280 | this can be a really useful starting point.

00:43:55.800 | And I think that we owe a great debt to to Bingen and the Trinity guys

00:44:00.920 | for popularizing this, because I think it's given people

00:44:04.320 | a much more conservative estimate for how they can do their own

00:44:09.520 | their own retirement planning, at least as a starting point.

00:44:11.760 | It gives them a number to shoot for.

00:44:13.800 | So I think it's very useful.

00:44:15.160 | But also we've got to keep doing the research around it like we've been doing.

00:44:18.720 | Yeah, and it definitely is a lot more realistic.

00:44:23.400 | Because Dave Ramsey and his radio show today still talking about the eight

00:44:27.600 | percent safe withdrawal rate, 100 percent stocks.

00:44:30.320 | And that's something that Bingen figured out for us back in the 1990s.

00:44:35.240 | It's just wrong.

00:44:37.000 | Yeah, that one is just so dangerous.

00:44:38.920 | And it's flat out.

00:44:40.760 | I'm very uncomfortable with that.

00:44:43.640 | And I have I have had clients in my office

00:44:46.320 | telling me that saying, look, I can do eight percent, both on retirement

00:44:50.440 | and also based off of life insurance analysis,

00:44:53.320 | because he gives the same advice for life insurance analysis.

00:44:55.560 | You need ten eight to ten times your income.

00:44:57.920 | Twelve percent returns pull off four percent for inflation.

00:45:01.200 | You can you can take your eight percent.

00:45:03.000 | You can take your eight percent distribution.

00:45:04.920 | And I sit there and I scratch my head and I say, do you realize

00:45:07.520 | how nuts that scenario is in the real world?

00:45:11.440 | So I'm glad that you are pointing out it out from an academic perspective.

00:45:15.680 | The danger in that.

00:45:17.920 | What I'd like to talk about is I'd like to talk about some of the assumptions

00:45:22.320 | that are inherent in the research that you're doing.

00:45:25.800 | And here's one thing that does get me very nervous.

00:45:28.160 | I get very nervous that all of this is based upon a

00:45:32.880 | all of the research that we've been doing in this scenario

00:45:35.920 | is based upon the data that we have over the last, say, since accurate data

00:45:40.040 | since the late 1920s. Right.

00:45:43.440 | And I'm concerned about taking those results

00:45:47.000 | and projecting them forward to the future.

00:45:49.120 | And although I don't necessarily feel like we have to throw those results out,

00:45:55.640 | I certainly don't think that I think it's naive to do all of our driving

00:45:59.920 | by looking in the rearview mirror and

00:46:02.680 | and not looking forward and say and recognizing that it's possible

00:46:08.040 | that the future does look different than the past.

00:46:10.000 | It's possible that we do have different economic growth rates.

00:46:12.480 | It's possible that as we look at some of the economic challenges,

00:46:16.440 | that the future may look different and that would dramatically affect these.

00:46:21.800 | Models that we use.

00:46:25.560 | What thoughts do you have on my concern about looking at backward

00:46:29.200 | looking assumptions? Right.

00:46:32.160 | Yeah, my my very first article that I published in the Journal of Financial

00:46:36.080 | Planning was I had a there's now 20 countries, 20 developed market countries

00:46:41.640 | where we have the financial data going back to 1900.

00:46:44.480 | And just looking at with the 4% rule have worked in all these other countries.

00:46:48.720 | And basically it would have worked in the US and Canada.

00:46:51.640 | But there's there's a lot of well, I forget the number like.

00:46:58.880 | At the aggregate level, I think the 4% rule has about a 66% success rate

00:47:04.200 | historically across all these countries, such that part of the problem is just

00:47:08.240 | we're dealing with in the 20th century, the US became the world's leading superpower

00:47:12.720 | and the world US stock market capitalization.

00:47:16.160 | That was about 20%.

00:47:18.280 | The US stock market was about added up to 20% of the total world stock market in 1900.

00:47:23.440 | And it was like 50% in 2000.

00:47:27.040 | And in those kinds of circumstances.

00:47:28.960 | The US, it's a really unique time in world history where a country grew so rapidly

00:47:35.080 | in such a short period of time, and it's not even being pessimistic about the future

00:47:40.000 | of the US, you can still be optimistic, but still say maybe in the 21st century,

00:47:45.640 | we're going to have a bit more average type of performance with our equity markets,

00:47:50.320 | in which case just that alone means 4% is not going to be as safe as it looked in

00:47:56.560 | US historical data.

00:47:57.800 | So you're right about that.

00:47:59.760 | It's the 4% rule is just based on US historical data since, well, banking used

00:48:07.320 | since 1926.

00:48:08.400 | And we do have Robert Shiller data on his website goes back to 1871.

00:48:13.000 | The 4% rule did work in that older period as well.

00:48:16.760 | But that's what it's based on.

00:48:18.720 | It's a relatively short period in world history.

00:48:20.880 | Right.

00:48:21.520 | And it's, and like you said, it's a, it's a period of, of tremendous growth.

00:48:25.960 | And one of the major concerns that I have is that in all of my formal training as a

00:48:31.840 | financial advisor, the training that I received to pass the government licensing

00:48:36.200 | exams, the training that I received to pass the, you know, my, my firm's elements,

00:48:42.600 | you know, financial planning education, the majority of the, the information that

00:48:47.720 | we study is based from a US American centric context.

00:48:52.320 | And so if you were to ask me, what is the average return of the general US stock

00:48:57.680 | market over the last a hundred years, I got an easy answer.

00:48:59.560 | I know that, but I don't have any idea about what the average return of the

00:49:03.040 | major German companies has been or the major English companies have been.

00:49:07.120 | And by putting a historical lens to, to the world and looking at it and

00:49:13.680 | recognizing that we have had a history of, of time in the United States that has

00:49:18.040 | been massive growth, that it seems that US America, many US American companies

00:49:23.120 | have had major successes on a global scale, but yet looking at the trends and

00:49:28.800 | the forces that, you know, the US American economy, that the individual

00:49:32.760 | companies are doing very well.

00:49:35.240 | But if you look at how much of the money is kept offshore because of the, the US

00:49:40.520 | tax policy, if you look at the changes with the corporate, the, you know, some

00:49:45.280 | of these corporate inversions that are gaining news, that are hitting the news

00:49:48.200 | now, I think that's a trend that's only just beginning.

00:49:50.680 | I could be wrong about that, but that's a trend that's only just beginning.

00:49:53.760 | And the major economic headwinds of, you know, basically to use professor

00:50:00.200 | Kotlikoff's numbers from Boston, from Boston college, $222 trillion of

00:50:05.320 | unfunded liabilities and national debt facing the US American economy.

00:50:09.840 | It's hard for me to see how the future won't look different than the past.

00:50:13.840 | Now, what it looks like, I don't know, but it's hard for me to see how the

00:50:17.040 | future won't look a little bit different.

00:50:18.600 | And then you must've experienced that.

00:50:20.840 | You said you taught in Japan for 10 years.

00:50:22.440 | That's always the example that is cited in, in financial markets.

00:50:27.200 | It's hard for me to feel so confident about the 4% rule, looking

00:50:31.480 | at some of those headwinds.

00:50:32.680 | Yeah, I think fair enough.

00:50:36.360 | And just so, well, to give you the answer that William Bengen would, would give

00:50:41.840 | for that is yeah, all that may be true, but if you look at this US historical

00:50:46.720 | period, it had the great depression and it had the stagflation of the 1970s and so on.

00:50:51.560 | And the 4% rule had survived through all of that.

00:50:54.880 | So in that regard, there's some precedent that we could rely on it in the future.

00:51:00.040 | But no, I agree with you.

00:51:01.640 | I think that the US historical period is not enough.

00:51:05.800 | And there's all these things that could be different in the future.

00:51:08.520 | And just simply looking at the fact that in other countries, results varied.

00:51:13.080 | Yeah, the US equity markets in the 20th century, basically with that data set,

00:51:17.880 | Australia was the only country that had a higher stock return and

00:51:22.480 | less stock volatility than the US.

00:51:24.320 | There are a couple other countries that had higher average stock

00:51:28.160 | returns, but much more volatility.

00:51:30.040 | So a much lower compounded return.

00:51:32.040 | And then all the rest of those countries were lower, mostly lower.

00:51:37.400 | Well, Canada had a lower return, but less volatility than most every other

00:51:41.720 | country was lower returns and more volatility.

00:51:44.600 | The US really came out of that right near the top of the heap.

00:51:49.320 | And with Australia, even in Australia's case, the 4% rule didn't work.

00:51:54.520 | They, in the stagflation they experienced in the 1970s, 3% ended up being a much

00:52:01.240 | more realistic number than 4%, even though they had a better equity market

00:52:06.080 | performance. And I'll give Bangan his Great Depression data, but I would

00:52:13.400 | observe and I would say that the United States of America of 2014 is different

00:52:19.760 | in many ways than the United States of America in 1914.

00:52:22.720 | There's a dramatically different culture.

00:52:24.760 | There's a dramatically different socioeconomic context.

00:52:27.080 | There's dramatically different costs, embedded costs for doing business.

00:52:31.440 | And I mean, I'm happy to give him the 4%, but it certainly seems to me that we

00:52:38.080 | live in a very different world than we did back then, a world that is much

00:52:41.000 | better in many ways, much greater access to life enhancing technology, a much

00:52:46.600 | higher standard of living for the average person, and yet a world that is

00:52:50.320 | dramatically different and has many more embedded costs in 2014.

00:52:54.840 | And so I don't know how to reconcile those things.

00:52:59.760 | Right. And some other research I've been involved with, with David Blanchard

00:53:03.200 | and Michael Finca, was looking at how well low bond yields mean lower future

00:53:08.200 | bond returns, which imply a lower withdrawal rate.

00:53:11.040 | As we were kind of talking about earlier, when interest rates are so low, it's

00:53:14.400 | very difficult to get income from the portfolio.

00:53:16.800 | You have to spend some of the principal.

00:53:18.960 | And then Robert Shiller has the cyclically adjusted price earnings ratio,

00:53:24.800 | which is a ratio of how highly stocks are valued, are they overvalued or

00:53:30.120 | undervalued, and it's currently at levels that are right up near the highest in

00:53:35.720 | history, only exceeded right before the great depression, Robert Shiller's PE10

00:53:42.560 | had a higher value, and then it had a significantly higher value in the late

00:53:46.320 | 1990s, as we had that lead up to the bursting of the tech bubble.

00:53:51.240 | But we're now at a point where we don't have much experience with such low bond

00:53:55.120 | yields and high stock market valuations at the same time.

00:53:58.560 | The only other time that happened was 1898, 1899 and 1900.

00:54:03.880 | So we really are in this sort of uncharted water.

00:54:06.960 | Higher stock valuations mean lower expected future stock returns and lower

00:54:12.080 | sustainable withdrawal rates.

00:54:13.280 | So high valuations, low bond yields, it's sort of uncharted water with that, even

00:54:19.280 | though the thing about the great depression was there was dramatic

00:54:24.000 | deflation and also the real return on bonds doubled in the 10 years between

00:54:30.240 | 1929 and 1939.

00:54:32.040 | So even the stock market performed so abysmally.

00:54:37.120 | Bonds were doing great.

00:54:39.320 | Deflation meant when you're testing the 4% rule, rather than having to increase

00:54:45.280 | spending each year, you actually get to decrease spending each year because of

00:54:48.320 | the deflation in the economy.

00:54:49.640 | So the 4% rule ended up being fine in the great depression.

00:54:53.320 | And it's not clear that that's, I mean, we don't have to have another great

00:54:59.360 | depression to have a set of circumstances where the 4% rule wouldn't work.

00:55:02.840 | Right.

00:55:03.440 | The permanent portfolio guys are screaming to say deflation, our plan works

00:55:07.120 | in deflation too.

00:55:08.520 | I can hear them in my ear saying, get out of this stock bond paradigm and come over

00:55:16.080 | to the permanent portfolio side where we bring in some of the other, hopefully

00:55:19.960 | non-correlating assets.

00:55:21.360 | I have one other thought.

00:55:24.080 | I'm interested in your feedback.

00:55:25.400 | And I've got three more questions and then we'll wrap up.

00:55:29.280 | But I feel another major change that, and one thing that I'm particularly

00:55:35.000 | attracted to is bringing back the influence of dividends on an investor's

00:55:40.840 | portfolio, because in many ways, the easy answer to this retirement

00:55:46.000 | distribution rate, the safe withdrawal rate is don't burn your principal and

00:55:50.320 | set up a system where your principal is not being invaded.

00:55:53.120 | So if you had a portfolio of dividend producing stocks and you were just

00:55:57.400 | spending the dividends, then no matter what's happening to the underlying

00:56:00.800 | values, you can live off of that stream of dividends.

00:56:03.000 | You're not going to exhaust your portfolio.

00:56:04.400 | This is an advantage that rental real estate has, that if you have rental real

00:56:09.960 | estate, you can just spend your net rental income without worrying necessarily

00:56:14.080 | about the underlying value of the portfolio.

00:56:15.960 | And one of the concerns, however, is as our society has shifted away from

00:56:21.240 | dividends and with this emphasis, and for example, the most popular investment

00:56:27.200 | strategy now is the total return strategy and using indexing.

00:56:30.640 | I'm just, I feel like that to me feels safer than counting everything on these

00:56:36.000 | safe withdrawal rates.

00:56:37.960 | And I wish for a re-emphasis on dividends, on not invading principal, rather living

00:56:42.960 | off of the production of that principal.

00:56:45.880 | But it's hard to make that go with a client.

00:56:48.640 | It's hard to make that go with a client who doesn't have enough to live off of

00:56:52.120 | dividends only to support their level of lifestyle.

00:56:54.280 | Do you have any thoughts or feedback or is there anyone kind of bringing back a

00:56:58.720 | focus on dividends into the portfolio research?

00:57:01.600 | Yeah, I think that's a viable strategy.

00:57:05.520 | I don't really have a strong opinion about it.

00:57:07.640 | It's certainly like internet discussion boards and things.

00:57:12.120 | A lot of people will talk about how they've basically built a portfolio of

00:57:16.040 | dividends stocks that are going to cover their retirements.

00:57:19.360 | And I think, yeah, we'll help with the sequence of returns risk if you can

00:57:22.600 | avoid selling principal when the market is down, that if you're able to just

00:57:29.640 | live on those dividends and historically dividends do tend to keep up so that

00:57:34.560 | even if the stock price goes down, the dividend check might go down a little

00:57:38.760 | bit, but not by as much as the stock price.

00:57:40.960 | I know William Bernstein, who's a writer and planner in Oregon has said, you

00:57:47.800 | could basically treat 50% of your dividend level as safe, historically

00:57:53.080 | dividends have never fallen by more than that.

00:57:55.000 | The only other point about this is Vanguard did a study where they talked

00:57:59.640 | about how portfolios focused on higher dividends tend to have lower total

00:58:05.560 | returns than just the total market portfolio.

00:58:11.240 | And in that regard, maybe an inferior strategy, but at the same time, though,

00:58:17.120 | if this is something that the client understands and can stick with and that

00:58:23.160 | Vanguard study didn't incorporate the sequence risk, if this really does help

00:58:26.680 | to avoid some of that sequence risk.

00:58:29.520 | Yeah, I think it could be a viable strategy.

00:58:31.360 | It needs to be studied more, but it's also difficult because it's just getting

00:58:35.480 | the historical data on different individual stocks and their dividends and

00:58:40.000 | so forth.

00:58:40.480 | It's a little bit hard to define how you would study this in a systematic way.

00:58:47.560 | But at some point, yeah, someone might look in that direction.

00:58:50.920 | Especially in the light of the changing investment climate, because dividends

00:58:54.360 | are so heavily penalized today that you see many companies just for the sake of

00:59:00.040 | their shareholders.

00:59:00.680 | And I'm uber simplifying the discussion, but simply saying, why would we pay

00:59:06.160 | dividends?

00:59:06.840 | We have the worst taxation policy ever on dividends.

00:59:10.480 | It's better in our clients, in our customers, best in our owners, best

00:59:14.320 | interests for us to enhance their capital gains.

00:59:17.680 | It's better for us to do stock buybacks.

00:59:20.120 | It's better for us to do other alternative methods to return that money to our

00:59:23.920 | shareholders than paying dividends.

00:59:25.640 | And so I've read research that would just show there has been a change in the

00:59:30.640 | investment climate.

00:59:31.560 | And so you would have to factor that into the research as well, which would make

00:59:35.440 | it tough.

00:59:35.920 | I just think it's more intuitive in many ways.

00:59:41.680 | And one of the challenges, and I'll wrap up the research portion and get into

00:59:49.840 | just a couple of your thoughts on solutions.

00:59:51.400 | But one of the challenges when we talk about retirement planning, that's such a

00:59:55.280 | generalized term.

00:59:56.480 | In my mind, I think about in many ways, almost three different levels of

01:00:00.160 | retirement planning.

01:00:01.000 | If I'm doing planning for somebody who doesn't have many assets and is still

01:00:04.760 | interested in retirement planning, then their retirement planning, let's say

01:00:08.440 | lower income, lower assets, their retirement planning is going to look very

01:00:11.840 | different than a moderate middle income, middle assets, middle class person versus

01:00:17.520 | an affluent person.

01:00:18.720 | Is that someone who is poor and is planning for retirement, 4% is not going

01:00:25.240 | to be a strategy that's going to be central.

01:00:27.760 | And for someone who's affluent, 4% is not going to be a strategy that's central

01:00:32.920 | because there they may be able to deal with the variability of returns.

01:00:37.200 | They may deal with the sequence of returns.

01:00:39.440 | But where this 4% rule is most important would be for those, there's some term for

01:00:47.280 | it, I can't remember the right financial planning term, but...

01:00:49.520 | Mass affluent?

01:00:50.680 | Right, right.

01:00:51.520 | The mass affluent who they've got just enough money, but not necessarily a lot

01:00:56.840 | of excess.

01:00:57.800 | And then we're trying to figure out how can we maximize the spending of that

01:01:01.400 | income over their lifetime with the confidence and surety of knowing it's

01:01:05.720 | going to last for their entire lifetime.

01:01:08.760 | But we don't want to die with a bunch of money.

01:01:10.800 | We don't want to underspend.

01:01:13.120 | And so that's where some of this research is the most useful is in that middle

01:01:17.320 | tier where we're trying to maximize the return but not die with a bunch of extra

01:01:21.880 | money.

01:01:22.160 | So it's...

01:01:26.240 | That's a fair...

01:01:26.840 | Sorry, I didn't ask, I didn't leave you with a question.

01:01:29.840 | But that's where we've got to focus on.

01:01:31.520 | We've got to focus in a little bit more.

01:01:33.240 | And that's the job I think we as planners do is to interpret the research from the

01:01:38.320 | academic side, but then put it into context for an individual.

01:01:41.760 | And I think we can do a huge amount of good in that area.

01:01:44.400 | Any feedback on that comment?

01:01:47.000 | No, that's a fair point.

01:01:50.120 | And even...

01:01:50.880 | So even though there's a difference between what is the safe withdrawal rate and

01:01:55.760 | then what is more like an optimal withdrawal rate that balances those

01:01:59.480 | considerations for wanting to be able to spend more when you're still alive and

01:02:03.760 | healthy and know you're alive versus wanting to protect.

01:02:09.080 | There's not a high chance you're going to still be alive at age 100, but you don't

01:02:12.800 | want to be alive and destitute at age 100.

01:02:16.160 | And looking at how to balance all that out, that moves you away from necessarily

01:02:21.200 | using the safe withdrawal rate to using something that might kind of balance

01:02:25.720 | those trade-offs better.

01:02:26.840 | And that's, yeah, we need more research in that area.

01:02:30.600 | That's the way the academics approach that is to use something called utility

01:02:34.840 | maximization of plugging in a formula of how much life satisfaction people get

01:02:39.720 | from different spending levels.

01:02:40.880 | And then that satisfaction decreases with higher spending and then try and translate

01:02:46.360 | that all into what's a good spending strategy.

01:02:50.040 | I'll have to research that more.

01:02:53.720 | I haven't spent a lot of time reading any of that literature, so I'm interested in,

01:02:56.880 | I wrote that down.

01:02:57.520 | I'm interested in reading some of the, some of the research in that area.

01:03:00.360 | We just celebrated my grandmother's 100th birthday last week.

01:03:04.240 | So thanks.

01:03:05.920 | It does happen.

01:03:06.720 | And you're right.

01:03:07.400 | Was she on the Today Show with the Leatherman?

01:03:14.280 | No, no, she wasn't.

01:03:15.960 | But she's doing well.

01:03:16.800 | She lives in Wyoming and she is doing well.

01:03:19.360 | All the family got together and celebrated her.

01:03:21.920 | And it just shows that, you know, who knows, she could live another week or she

01:03:26.200 | could live another 10 years.

01:03:27.400 | And you've got to account for that in your planning.

01:03:29.680 | It makes a difference.

01:03:32.520 | I'd like to ask you just a couple of questions.

01:03:34.800 | And as we wrap up about where to help our listeners continue their own research.

01:03:41.800 | First, there's a lot of debate about the stock bond allocation.

01:03:46.080 | Do you have some guidance that you could give people as far as how to think through

01:03:51.760 | their own allocation in their portfolio of stocks versus bonds, maximizing the total

01:03:57.400 | returns of exposure to stocks versus maximizing the volatility from greater

01:04:03.440 | exposure to bonds?

01:04:04.520 | Do you have any guidance that you could give people as far as how to think through

01:04:08.680 | that question for themselves, especially in light of safe withdrawal rates?

01:04:11.680 | Yeah, so the safe withdrawal rates, the 4% real style thinking is 50 to 75% stocks

01:04:22.000 | in retirement.

01:04:23.440 | So the idea, if you're focused on upside and just want to maximize wealth or

01:04:27.840 | maximize the legacy, the inheritance you leave behind, then just the highest stock

01:04:33.120 | allocation that you can feel comfortably go with is going to, on average, give you

01:04:37.040 | the most wealth at the end.

01:04:38.880 | On the downside of trying to protect your spending, and that's where the 4% rule is

01:04:43.000 | focused on trying to protect your spending.

01:04:45.360 | Then actually even going back to some of Bengen's original work, the asset

01:04:51.200 | allocation doesn't matter that much anywhere between about 30 and 80% stocks

01:04:56.400 | is going to give you about the same worst case scenario with sustainable withdrawal

01:05:01.480 | rate.

01:05:01.760 | And then with the sequence risk as well.

01:05:04.880 | So one of the areas where I did research with Michael Kitsey, we wrote about the

01:05:09.920 | rising equity glide path in retirement.

01:05:12.040 | But the idea instead of sticking with, say, a 60, 40, 60% stocks over your whole

01:05:17.560 | retirement, you start at retirement with about 30% stocks and then slowly work your

01:05:22.880 | way up towards 60% stocks that that can potentially provide even further protection

01:05:29.160 | on the downside while also giving you a lower average stock allocation.

01:05:33.360 | It is clear that most retirees are going to need some stocks because fixed income, if

01:05:40.080 | they want to spend more than what the yield curve of more than what's feasible with a

01:05:45.800 | fixed income portfolio, then they have to take some market risk.

01:05:50.240 | They have to have some stocks in the portfolio to hope that are hopefully going

01:05:54.000 | to grow and help provide protection for inflation.

01:05:56.520 | So definitely need some stocks, but you're getting to then the point of.

01:06:02.920 | There are a wide variety of stock allocations that will get the job done, and

01:06:08.640 | it's not necessarily the asset allocation that's the most important variable.

01:06:12.320 | It's more about the spending rate, the flexibility with the spending.

01:06:16.600 | And then and then the asset allocation, your rising equity glide path article, I

01:06:24.920 | think, would be counterintuitive when we're accustomed to thinking about the

01:06:28.880 | approach taken by the target date retirement funds, which is to start off with

01:06:31.960 | heavy stocks and to continually continually diminish the exposure to stocks

01:06:37.040 | throughout our lifespan, throughout our lifespan.

01:06:40.960 | I understand your argument to be that by starting at the beginning of retirement

01:06:45.240 | with, as you said, a 30 percent stock allocation, 70 percent fixed income, then

01:06:50.320 | that would allow for a more stable portfolio and lowers the sequence of

01:06:54.600 | returns risk.

01:06:55.520 | And then as time goes forward, because we have to worry less about the sequence of

01:06:59.800 | returns risk, we can take more volatility as time goes forward because we have a

01:07:04.080 | shorter amount of time and it makes less of a difference in the portfolio.

01:07:07.200 | And so therefore, that's why you can increase your exposure to equities to

01:07:10.680 | capture the maximum total lifetime return throughout your retirement, because

01:07:15.520 | you're not so worried about having those four awful years, right, you know, from

01:07:19.200 | 65 to 69.

01:07:20.640 | Is that an accurate understanding of your of your paper and of your research?

01:07:24.000 | Yeah.

01:07:25.560 | And basically, if you're not in the worst case scenario, your wealth continues to

01:07:30.000 | grow. And so your withdrawal rate as a percent of what's left in the portfolio

01:07:34.560 | is actually decreasing.

01:07:36.640 | And so your retirement become even more stable and then you're bringing back up

01:07:41.280 | the equity exposure.

01:07:43.120 | And yeah, that's if you are in a worst case scenario, it's you get those poor

01:07:49.400 | market returns in early retirement.

01:07:51.120 | You have a lower stock allocation at that time to protect you.

01:07:54.240 | And then to the extent that poor market conditions don't last forever, you're

01:08:00.160 | going to be increasing your stock allocation at a time where you're going to

01:08:03.680 | hopefully be getting some some better market returns.

01:08:07.160 | Right.

01:08:07.680 | And that's right.

01:08:09.560 | It's I'm glad you pointed out it's very counterintuitive, though, for people.

01:08:14.080 | I think it's very counterintuitive for people who have just mainly been exposed

01:08:16.920 | to this idea that as you get older, constantly decrease your exposure to

01:08:20.800 | equities. If you were encouraging, if there was somebody with an above average

01:08:25.400 | interest in this stuff, whether it's because they're trying to figure out their

01:08:28.440 | own plan or whether it's because they're an advisor or a planner who's trying to

01:08:32.040 | help clients, somebody with an above average interest, where would you

01:08:36.040 | encourage someone to go to start their research and to start their their

01:08:40.600 | learning path?

01:08:41.520 | How would you teach somebody to educate themselves on this area?

01:08:46.120 | That's a good question. I've I've got a blog that I write quite frequently about

01:08:53.320 | even reviewing different studies from others.

01:08:55.320 | So that could be a good starting point.

01:08:59.320 | And that's if you just Google my name, you'll come across the blog pretty

01:09:03.120 | easily. My last name is Piazan Paul, F as in Frank, A.U.

01:09:08.200 | First name Wade, W.A.D.E.

01:09:10.440 | And then the American College also has the New York Life Center for Retirement

01:09:14.720 | Income, even though it has the corporate sponsor there.

01:09:18.240 | So New York Life is an insurance company, but it's got it's a great educational

01:09:23.280 | resource with interviews with a lot of different experts from all over different

01:09:27.720 | aspects. And so that you can watch through those videos.

01:09:31.520 | It's a great education.

01:09:32.800 | And that's even where basically some of these the arguments in favor of the

01:09:38.160 | probability based approach.

01:09:39.640 | A lot of that comes with interviews with Michael Kitsies and Jonathan Guyton

01:09:43.640 | available through the New York Life Center.

01:09:45.920 | So even though they're basically against insurance solutions, just pro total

01:09:51.720 | returns investing, it's an unbiased source of information that you can hear all

01:09:56.080 | the different sides of the story with the video series there.

01:09:59.480 | And yeah, I think those are my blog and then the New York Life Center video

01:10:05.280 | series would be two really good places to get started for financial advisors.

01:10:10.200 | The American College also has the RICP designation.

01:10:13.920 | It's a three course sequence, a retirement income certified professional that

01:10:19.080 | goes into great detail about how all the different retirement income tools work

01:10:23.480 | and how to build a retirement income portfolio and how to claim Social Security

01:10:28.000 | and and just a whole lot of information related to retirement income.

01:10:33.160 | And I'll put in a plug also, those are both really good results.

01:10:38.080 | I'd put a put in a plug for people to find for a for if you're an advisor or

01:10:43.120 | planner become really excellent in this stuff.

01:10:45.440 | I think the RICP curriculum from the American College is probably a perfect

01:10:49.360 | place to start. And also, I mean, I haven't done that course of study.

01:10:53.360 | Myself, but from all of the exposure that I've had to the topics that are

01:10:58.000 | covered, I may do it myself just to give myself an organized way to work through

01:11:02.000 | it. So if you're an advisor or planner, specialize in this.

01:11:05.520 | And then if you are an individual consumer, I think this is really one of the

01:11:09.800 | most valuable places that an individual financial planner can have.

01:11:15.160 | One of the biggest impacts that an individual financial planner can have on

01:11:19.800 | your situation, it's unusual.

01:11:22.040 | A lot of times people think a financial advisor, financial planner is all about

01:11:25.240 | maximizing the rate of return on their on their portfolio.

01:11:29.920 | That has very little impact on on any of these studies.

01:11:35.200 | These studies are all using index data, right?

01:11:37.800 | Dr. Pfau, is that right? Yeah, right.

01:11:40.240 | Right. It's all index data.

01:11:41.720 | So all of these are based upon index data.

01:11:44.160 | All of these are based upon just, you know, it's this is investing style

01:11:49.440 | diagnostic. But there are so many little things that a good planner can do, little

01:11:55.040 | things that can help, whether it's a Social Security distribution strategy,

01:11:57.920 | maximizing that, just a huge amount of of research that that somebody can do.

01:12:04.480 | There's a huge amount of good that a planner can do in this area that can help.

01:12:09.080 | And I really believe, even though we've kind of glossed over it, I believe that

01:12:13.360 | some of these other strategies that that have been developed, whether it's a, you

01:12:18.760 | know, the systematic withdrawal strategy, focusing on the the the total return from

01:12:23.160 | a portfolio, a bucket strategy where you're, you know, you're you're setting

01:12:27.760 | aside different buckets of of investments towards different points of retirement, a

01:12:31.960 | flooring approach where you're trying to put a floor in place, an asset dedication

01:12:36.320 | approach where you're trying to match invest and invest certain investments to

01:12:41.280 | liabilities that are going to be incurred during retirement.

01:12:43.920 | These strategies have been developed to try to help people to feel more

01:12:47.080 | comfortable with their portfolio.

01:12:49.200 | And going back to my bias towards behavioral investing, the key to any plan

01:12:55.160 | is having you as an individual feel comfortable with the plan.

01:12:59.000 | And if you feel comfortable with the plan, you'll follow it through.

01:13:01.320 | So one person may be very comfortable with a 4% rule and just a series of

01:13:05.920 | systematic withdrawals.

01:13:07.080 | Another person may not be comfortable with that and they'll bail on the plan, in

01:13:10.600 | which case all the academic research in the world doesn't help a bit.

01:13:14.360 | When the market is, you know, when the market is taken to 25% decline and

01:13:19.200 | you're sitting there saying, how am I going to eat next year?

01:13:21.280 | You might need a different plan if that's your personal, if that's your personal

01:13:25.640 | approach.

01:13:26.040 | So my plea would be advisors, sharpen up and potential clients consider

01:13:31.360 | consulting an advisor in this area.

01:13:32.800 | It's a real, real value add in my opinion.

01:13:35.160 | Dr. Fowler, I think that is most of what I had on my list.

01:13:40.840 | Can you think of anything that I missed that you think would be valuable for

01:13:43.800 | people to be aware of?

01:13:45.240 | No, I think we had a pretty good introduction, but yeah, we, there are

01:13:51.680 | different retirement income strategies.

01:13:53.200 | We didn't really talk much about that.

01:13:55.920 | The buckets are time segmentation or asset dedication that you just mentioned.

01:13:59.880 | But yeah, that's basically, you've got the systematic withdrawals, things like

01:14:05.200 | the 4% rule, then you've got holding individual bonds to meet upcoming

01:14:09.520 | expenses in the near term, and then having stocks or other growth investments

01:14:13.360 | for the longterm and then essentials versus discretionary, which is the floor

01:14:17.760 | upside.

01:14:18.240 | It's building a safe and secure income floor for the basics and then having more

01:14:24.440 | volatile assets for discretionary expenses.

01:14:26.800 | And yeah, it's, it's complicated.

01:14:29.480 | It's William Sharpe who won a Nobel prize in economics.

01:14:33.400 | He developed a lot of the tools of modern finance.

01:14:36.040 | He said that he's now devoting the rest of his career to retirement

01:14:40.600 | income planning research.

01:14:42.080 | Wow.

01:14:42.680 | And he says it's the most difficult problem he's ever looked at.

01:14:45.520 | So it's, it's tough.

01:14:48.240 | So there is value in advisors, getting more education and then individuals

01:14:52.240 | running things by an advisor to make sure that they're not making mistakes.

01:14:57.480 | Even with social security, it's the difference between a good claiming

01:15:02.120 | strategy and a kind of default.

01:15:04.160 | A lot of people just want to take it to age 62.

01:15:06.720 | Well, if they end up living into their eighties or nineties, they could get a

01:15:11.160 | hundred, more than a hundred thousand dollars more if they make an optimal

01:15:15.000 | claiming strategy.

01:15:15.960 | So it's an area where mistakes can be made and it's important to make sure

01:15:20.160 | you're doing things right.

01:15:21.040 | And spend more time thinking about your retirement strategy than you do where

01:15:26.080 | you're going to buy the next vacuum cleaner to save $10 on the price.

01:15:29.240 | It's, we're talking about hundreds of thousands of dollars with retirement

01:15:32.800 | income planning.

01:15:33.440 | It's huge.

01:15:34.320 | It's huge.

01:15:34.800 | It's hard for me to understand.

01:15:36.480 | I understand that.

01:15:37.840 | And I'm very frustrated with my own industry as far as some of the awful

01:15:42.840 | work.

01:15:43.120 | We deserve a lot of the criticism that we've taken.

01:15:45.080 | It's very difficult for me to see, however, how an average person will be able

01:15:51.040 | to retire successfully without the input of a good financial advisor around these

01:15:55.840 | strategies.

01:15:56.520 | And just from having worked with average people, it's very difficult for me to see

01:16:00.160 | how you can't do it with an advisor.

01:16:02.040 | And I'll give you one anecdote, Dr.

01:16:03.600 | Fowle, when I was up, when I was up your way last week in Bryn Mawr there for our

01:16:08.040 | MSFS capstone class, here is a room of some of the most qualified financial

01:16:12.680 | advisors I've ever sat in a room with.

01:16:14.440 | And we were going over retirement distribution strategies.

01:16:17.400 | And one of the individuals in our class had made an in, what's the word that

01:16:23.520 | means?

01:16:23.960 | Not, not ideal.

01:16:25.040 | Like it wasn't the most ideal decision for social security.

01:16:29.240 | And he had been pressured by the social security administration.

01:16:33.080 | And I use the word pressured intentionally because that was what he

01:16:35.600 | experienced.

01:16:36.280 | He'd been pressured into taking an, a suboptimal distribution strategy.

01:16:40.480 | And thankfully, I think we were able to help him give him some strategies for

01:16:43.800 | unwinding that strategy and deferring it a little bit more.

01:16:47.040 | But even amid, amidst a bunch of experts, many of us have made mistakes, me

01:16:53.080 | included.

01:16:53.600 | So I think I'm glad to hear that about William Sharpe.

01:16:56.480 | I have to, I have to reach out to him and maybe talk with him about some of what

01:17:00.240 | he's been studying.

01:17:01.520 | And thank you for the work that you're doing.

01:17:03.200 | I really appreciate it.

01:17:04.120 | Okay, thank you.

01:17:06.080 | Do you feel more well educated now?

01:17:11.320 | I hope you do.

01:17:12.600 | That was the purpose of the show.

01:17:13.640 | So hopefully that starts to give you some background for the 4% rule.

01:17:17.600 | I would encourage you to go over to Dr.

01:17:20.000 | Fowle's blog.

01:17:20.600 | If you're interested in the technical side and the technical aspects of some of

01:17:23.720 | the academic literature that has been done in this area, start with his blog.

01:17:28.000 | He does a good job of linking to some of the different resources and of discussing

01:17:32.160 | some of the different resources that are available.

01:17:33.960 | Certainly not an easy area of science to read through, but it's an important

01:17:38.760 | science area of science.

01:17:40.080 | I'm going to try as time goes on to bring you, maybe talk through some of the

01:17:43.360 | articles, talk through some of the different strategies that we talked about.

01:17:46.480 | May bring Dr.

01:17:47.720 | Fowle back in the future to discuss some of the strategies.

01:17:49.880 | Probably the key thing that I would explain to you, however, is I think there's a big

01:17:55.200 | difference between being able to talk about this information in a technical way

01:17:59.520 | that's straightforward and being able to apply it to an individual situation.

01:18:04.240 | In my experience working with clients, that's where the real rubber meets the

01:18:08.360 | road.

01:18:08.600 | That's where a good financial planner can really have a fighting chance, I think,

01:18:15.080 | to really impact a client's, it really impacts your situation.

01:18:19.600 | So I would encourage you to consider this, but don't go too deeply into the

01:18:24.840 | technical side because the technical aspects are just really one side of the

01:18:28.400 | situation.

01:18:28.960 | But hopefully you feel more well educated now and able to understand the

01:18:33.320 | information that comes at you.

01:18:34.440 | That's it for today's show.

01:18:36.040 | Hope you've enjoyed it.

01:18:37.560 | Back in the saddle now, doing these shows full time.

01:18:40.480 | Got some more interviews coming this week and answer some listener questions.

01:18:43.680 | Really working on improving some stuff on the show.

01:18:47.320 | I've got a lot of things on my to-do list.

01:18:49.360 | To improve, I thank you for being here and would love your feedback on today's

01:18:54.520 | show.

01:18:54.760 | It's challenging to do these technical shows, but I think I'm going to try to do

01:18:57.520 | more of them, especially in an interview format.

01:19:00.320 | I'm going to try to do more on my own as well.

01:19:02.840 | So we'll just see how it goes.

01:19:04.880 | Learning with you.

01:19:06.240 | Thank you for listening.

01:19:07.560 | Make sure that you are subscribed to the show and whatever your preferred

01:19:11.520 | subscription technology solution would be, whether that's iTunes or Stitcher or

01:19:16.000 | wherever you like to subscribe to stuff and you're a podcatcher, make sure that

01:19:19.920 | you're subscribed.

01:19:20.560 | Thank you for those of you who've been leaving reviews.

01:19:22.560 | I really value those reviews.

01:19:24.240 | They encourage me and keep me going.

01:19:25.920 | Have a great Wednesday, everybody.

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RPF-0073-4_Rule_Interview_with_Wade_Pfau